There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Latin Resources (ASX:LRS) shareholders have done very well over the last year, with the share price soaring by 374%. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given its strong share price performance, we think it's worthwhile for Latin Resources shareholders to consider whether its cash burn is concerning. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
View our latest analysis for Latin Resources
How Long Is Latin Resources' Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at December 2022, Latin Resources had cash of AU$26m and no debt. Looking at the last year, the company burnt through AU$16m. That means it had a cash runway of around 19 months as of December 2022. Notably, analysts forecast that Latin Resources will break even (at a free cash flow level) in about 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.
How Is Latin Resources' Cash Burn Changing Over Time?
Although Latin Resources reported revenue of AU$186k last year, it didn't actually have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. Its cash burn positively exploded in the last year, up 233%. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can Latin Resources Raise Cash?
Given its cash burn trajectory, Latin Resources shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).